"To get rich is glorious." -- Deng Xiaoping. This is perhaps the smartest thing ever uttered by a member of the Communist Party.

Monday, March 10, 2014

Inequality update

First up, a mostly sensible column in last Sunday's New York Times from Harvard economics professor Sendhil Mullainathan:

I worry about growing income inequality. But I worry even more that the discussion is too narrowly focused. I worry that our outrage at the top 1 percent is distracting us from the problem that we should really care about: how to create opportunities and ensure a reasonable standard of living for the bottom 20 percent.

Our passion about the widening disparity in wealth and income is easy to understand. After all, studies often find that unequal incomes reduce happiness. Of course they do: Jealousy and envy are strong emotions. They are also very basic ones that develop as early as 4 months of age. There is even evidence that great apes are averse to inequality. And though there is debate about that point, at least it produces enjoyable videos. Our outrage at inequality is primal.

But primal emotions are not always noble ones. Of course, when I see a colleague receive some award, I covet it. But this is not me at my best, and these are not the feelings we would instill and promote in our children. So why would we want public policy to cater to such feelings?

While Mullainathan's message that anger at the 1% is a distraction from finding ways of helping those at the bottom is absolutely correct, there are a couple of points worth quibbling with here. When Mullainathan references "our outrage" at the top 1% he seems to take it as a given that anger at the rich is widespread, but it's unclear how true this is. How much outrage against the 1% really exists outside of academia, Occupy Wall Street veterans and other assorted leftist ideologues? While it isn't hard to imagine that considerable ire exists among many Americans towards the financial sector and those who made their riches there given the huge public bailouts it has received over the years, it isn't obvious there is blanket outrage towards the 1% per se.

This ties into another point: it's instructive that when Mullainathan references his own personal envy and jealousy, it isn't in the context of the 1% but rather his colleagues -- people more like himself. Intuitively, this seems likely to be the case for most people. After all, who really measures their welfare against the 1% or uses people like Warren Buffet, Bill Gates or Hollywood celebrities as a personal measuring stick? Conversely, who gets any real satisfaction from outperforming (however one measures such things) those from a much lower socioeconomic demographic?

Rather, it seems much more plausible that people measure themselves against other people from a similar background -- friends, neighbors, family, colleagues, acquaintances from high school and college, etc. I would submit that much more jealousy is generated when someone's close acquaintance gets a new car, house or takes a fabulous international trip than when that same person discovers that some famous person just bought a 5th home.

These are, however, minor issues in what is overall a solid column which helps move the inequality conversation in the right direction (I would also disagree, however, with his argument that higher tax revenue is needed to promote greater opportunity).

Now let's move on to the bad, in the form of another New York Times column written by an academic economist, this time from -- surprise, surprise -- Paul Krugman:

[I]f generous aid to the poor perpetuates poverty, the United States — which treats its poor far more harshly than other rich countries, and induces them to work much longer hours — should lead the West in social mobility, in the fraction of those born poor who work their way up the scale. In fact, it’s just the opposite: America has less social mobility than most other advanced countries.

Actually, contra Krugman, there is no reason to think why the US approach to dealing with its poor would produce greater social mobility than countries with more elaborate social welfare schemes. The reason for this is very simple: social mobility -- a measurement Krugman also relies upon in a recent blog post -- is a terribly flawed measure of progress, as this example nicely illustrates:

Reihan Salam, a writer for The Daily and National Review Online, has calculated that a Danish family can move from the 10th percentile to the 90th percentile with $45,000 of additional earnings, while an American family would need an additional $93,000.

In other words, one method of boosting social mobility would be to simply reduce the earnings of the rich, thus compressing income percentiles and making it easier to skip from a lower percentile to a much higher one. Why that would be desirable, however, is unclear. If presented, for example, with the choice between getting a raise of $20,000 and jumping from the 10th percentile to the 90th in Country X, or getting an extra $80,000 and only jumping from the 10th percentile to the 20th in Country Y, how many people would choose the former?

To make this even simpler, just consider the fact that in a country where each person doubled their income year after year that social mobility would be zero, as everyone would remain in the exact same income percentile. For those obsessed with social mobility such a country would be a pariah, even though it would represent an amazing growth in living standards for its citizens.

The real intellectual bankruptcy of the income inequality issue, however, is to be found in a recent Twitter exchange I had with Sean McElwee. McElwee, who has extensively written about income inequality for such publications as Salon, The New Republic and The Huffington Post, caught my eye with this claim in a recent HuffPo piece:

When I pointedoutthemeaninglessness of Danish mobility statistics to McElwee he simply responded that he would "rather live in a more equal society." Doubting whether he actually meant this or fully appreciated his statement's ramifications, I then asked if he would prefer to live in a society where everyone made $15,000 per year (perfectly equal) or a range of $10,0000-20,000 per year (somewhat equal) over the status quo found in the US. Unsurprisingly he declined to answer, instead calling such scenarios "absurd situations."

After some more back and forth in which I argued that absolute welfare trumps relative welfare measurements (such as social mobility), McElwee stated that "I think relative welfare is intimately tied to absolute welfare." This is where the conversation took a very interesting turn. Wondering how McElwee's claim could be true, I then asked how my welfare would be harmed, for example, if Bill Gates were to accrue another billion dollars (in fact, Bill Gates gained another $4 billion in the last six months alone). McElwee's response? With his extra money Bill Gates could get more health care, which harms the rest of us because such purchases would come at the expense of others who require health care.

Think about this for a second. McElwee has spilled a lot of proverbial ink over the income inequality issue and has presumably given it considerable thought. When pressed for an example of how inequality can hurt others he, presumably reaching for his strongest argument (after all, he's had plenty of time to think the issue over), argues that inequality can deprive others of health care. Let's unpack just some of the ways in which this claim is absurd:

Bill Gates is worth $76 billion. Presumably that should be sufficient to cover every conceivable health care expense he may incur. Can anyone conceive of even an outlandish scenario in which Bill Gates receives an extra billion dollars and then proceeds to purchase additional health care with it because the $76 billion he already had was apparently insufficient to meet his needs? Does that even begin to make sense?

Conversely, if giving Bill Gates an extra billion dollars would result in someone being deprived of health care, then doesn't it also logically stand that taking a billion dollars away from Gates and dumping it into the ocean -- thus reducing inequality -- would then pave the way for someone previously denied health care to obtain it? Is that at all plausible?

Even if Gates did want to spend his extra money on health care, does anyone really think that the US is currently at its health care production possibilities frontier and that it would be impossible to create additional health care resources to meet additional health care demand from other people? That any additional demand from Gates would come at the expense of others? When pressed on this, McElwee just notes that there are limited resources and that scarcity is the central tenet of economics. True enough, and maybe someone would have to give something else up to obtain additional health care (for example, spending on a vacation or a new television), but the idea that we have already created all of the health care resources we possibly can is nonsense.

Let's also note that if we are currently at our health care production maximum that Obamacare is essentially an exercise in futility, as it is totally pointless to extend health insurance to more people if there is no more health care to be obtained.

Lastly, if billionaires buying up all the available health care, and thus denying it to others, one would think this issue would have been raised by the left during the great health care debate which proceeded the passage of Obamacare. It was not, presumably because it is not true and anyone who seriously made such a claim would have been laughed out of the room.

That The Economist is libertarian will no doubt come as a surprise to those active in libertarian circles. Let's note, for example, that the publication has endorsed Democrats in the last three US presidential elections and, in a 2012 economic "report card", gave President Obama an A- for his bailout of GM and Chrysler and a B+ for the 2009 stimulus package. Say what you will about either policy, they can't be accurately described as libertarian.

Given the frequently absurd arguments trotted out by the left on the topic of income inequality, it begs the question of why the issue animates them so deeply. Why do they continue to bang the inequality drums when the weaknesses in their arguments are so glaring? While it is impossible to know for sure, this recent statement from a leading member of the California state Democratic Party likely provides us with some real insight:

"I'm going to say something, and it's probably going to get me in trouble, but there are some people who are just too rich," said party secretary Daraka Larimore Hall in a last effort to rally the rank and file before delegates dispersed. "If we don't solve the problem of income inequality we will lose our souls and we will lose our republic."

This is the game right here. Ranting about income inequality isn't about raising up the fortunes of the poor, leveling the playing field or having a discussion about how best to increase the opportunities available to the less fortunate, but rather tearing down the rich (who frequently amass their fortunes in the marketplace, which leftists are distrustful of -- hence their constant calls for additional regulations to be placed upon it). As an added bonus, taking the rich down a peg via higher taxation helps provide more revenue for government do-gooding. Apply this template for understanding the inequality debate and everything begins to make sense.